Does making good karma with your investments pay off?

Photo by Eye for Ebony on Unsplash

ESG stands for environment, social, and governance.

ESG investing means that you care about the impact that your capital makes. It’s most prominently used for stock market investing but can also be applied to bonds, commodities, and other asset classes.

It’s been a growing investment theme ever since it was incepted by the UN in collaboration with major financial institutions in 2004. According to Wikipedia, more than $30 trillion is under management using the responsible investing approach.

That’s a lot of money.

How does it perform?

How risky is it?

This article looks into a US ESG ETF and compares it with the broad market.

What’s going on here?

One of the leading ESG stock market ETFs is the Vanguard ESG US Stock ETF, ticker symbol ESGV.

According to its latest fact sheet dated March 31, 2024, ESGV

Has $8.4B under management — quite a heavyweight.
Costs the investor only 9 basis points (0.09% or $9 per $10K market value) per year in expense ratio to access the world of US ESG equity investments through this ETF.
Is a passive fund tracking the FTSE US All Cap Choice Index. The index uses screening criteria for environmental, social, and corporate governance (ESG) aspects.
Is invested in a current total of 1,436 different stocks.
Has produced 15.15% annualized return over the last 5 years, and 31.43% in the last 12 months.
Incurred a standard deviation of 18.71% — a figure that measures risk (the lower the better).

What does that mean?

Let’s put ESGV in context. A good comparison would be an S&P 500 investment and a total market investment.

Over five years, ESGV has performed virtually identically with VOO, one of the leading S&P 500 trackers.

A hypothetical investment of $10,000 in either of the two ETFs on June 27, 2019, would have grown to more than $20,300. You can see this in the following chart.

5-year chart of a hypothetical investment of $10,000 in ESGV and VOO, according to Morningstar

In the post-pandemic stock market rally, ESGV had a bit of a lead. But it gave it up again during early 2022 and lagged by the end of that year. Since then, ESGV and VOO have been neck-a-neck.

Consequently, the picture looks quite similar if we look at only the last 12 months. Hypothetical investments of $10,000 each in ESGV and VOO on June 27, 2023, would have grown to virtually the same amount today. See the following chart.

1-year chart of a hypothetical investment of $10,000 in ESGV and VOO, according to Morningstar

In terms of risk, VOO would have been a tad lower and thus better. Its standard deviation of 17.6% beats ESGV’s 18.71% by more than a whole percentage point.

Why should you care?

If it’s important to you to care for how your money is used, an investment in an ESG-driven stock selection process looks like ticking two boxes at once: making a market-like return and doing good with your capital.

If we broadened the comparison from large caps (S&P 500) to the total market (e.g. ticker symbol VTI), ESGV would not only have matched the market. It would even have outperformed it.

The index that ESGV tracks specifically excludes stocks of certain companies related to weaponry, “vice” products such as gambling, alcohol, and tobacco, as well as potentially harmful energy such as nuclear power, coal, oil, or gas.

Your money would also not go to companies that do not adhere to certain environmental, labor, human rights, and anti-corruption standards. Even companies that do not meet a minimum level of diversity are excluded.

So, do you care and want good returns (with a tad more risk)?

ETF Nerd Summary

Doing good deeds, acting with a conscience, making good karma, and avoiding harming people and the rest of nature, seems to pay off not just in life generally but also in investing.

ESG investing, as represented by ticker ESGV in this article, has grown its investors’ money in a very similar fashion than a mainstream S&P 500 investment would have.

With the earth heating up and social conflicts seemingly on the rise, this trend of the last years may very well continue.

Thanks for reading.

Shine your light,Cristof

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